Loonie climbs as BoC policy outlook diverges from the Fed

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

TORONTO (Reuters) - The Canadian dollar strengthened against its broadly weaker U.S. counterpart on Wednesday, moving closer to last week’s eight-month high, as the Bank of Canada showed no sign that it would match potential interest rate cuts from the U.S. Federal Reserve.

The Bank of Canada left its benchmark interest rate on hold at 1.75% as expected and made clear it had no intention of easing monetary policy, while highlighting the risks trade wars posed to the global economy.

Meanwhile, Fed Chairman Jerome Powell reinforced expectations the U.S. central bank will cut interest rates for the first time in a decade at its next monetary policy meeting later this month, saying trade uncertainties and concerns about the global outlook continued to exert pressure on the American economy.

It’s a “contrasting story of central bank prospects,” said Shaun Osborne, chief currency strategist at Scotiabank. “It seems quite possible that we are going to get a pretty meaningful series of interest rate reductions from the Fed going forward here, and the Bank of Canada, in contrast, is suggesting that to a large extent it is going to sit this one out.”

While chances of an interest rate cut this year by the Bank of Canada rose to 35% from 20% before the interest rate announcement, that fell well short of expected tightening over the same period by the Fed. Investors see at least two Fed rate hikes by December. BOCWATCHFEDWATCH

At 4:21 p.m. (2021 GMT), the Canadian dollar CAD=D4 was trading 0.4% higher at 1.3080 to the greenback, or 76.45 U.S. cents. The currency, which last Thursday touched an eight-month high at 1.3038, traded in a range of 1.3063 to 1.3145.

Adding to support for the loonie, the price of oil, one of Canada's major exports, was boosted by data showing U.S. crude inventories shrank and as major producers cut nearly a third of offshore Gulf of Mexico production ahead of an expected storm. U.S. crude oil futures CLc1 settled up 4.5% at $60.43 a barrel.

Canada's yield curve steepened in sympathy with the U.S. curve. The two-year CA2YT=RR rose 10.5 Canadian cents to yield 1.583% and the 10-year CA10YT=RR was flat to yield 1.584%.

Reporting by Fergal Smith; editing by David Gregorio, Bernadette Baum and Jonathan Oatis